World stock markets entered March on shaky ground yesterday, falling for the third straight day before the second leg of United States Federal Reserve chief Jerome Powell’s testimony to lawmakers.
The testimony came two days after his hawkish comments ignited fears the Fed could deliver four US rate rises this year instead of the three already priced in, triggering an equity sell-off and pushing up bond yields.
The US dollar rose to six-week highs against a basket of currencies while the gap between short-dated US and German bond yields was at its widest since 1997.
MSCI’s all-country equity benchmark fell 0.4 per cent after snapping a record 15-month long winning streak in February, while European stocks lost 1 per cent.
Emerging Asian and Japanese shares also fell earlier, with the latter down 1.6 per cent.
Wall Street looked set for another weak open, futures signalled, after it ended February with its worst monthly performance in two years.
Chinese shares bucked the trend, however, edging up after a private survey showed manufacturing sector growth picking up to a six-month high.
Shanghai shares closed 0.4 per cent higher.
Fed chief Powell was yesterday expected to deliver the second leg of his semi-annual testimony, an opportunity to clarify comments made on Tuesday that rekindled speculation over US monetary tightening this year happening faster than expected.
The dollar, meanwhile, has taken heart from the Fed chair’s comments. The dollar index rose to 90.818, a six-week high.
It has clawed back from the three-year trough of 88.253 set in mid-February, as fears of a ballooning US budget deficit and worries of a possible weak-dollar policy from Washington took a toll.
The gap between short-dated borrowing costs in the United States and Germany was at its widest in over 20 years as the monetary policy outlooks for the two regions diverge.
The US/Germany two-year bond yield spread widened to 281 basis points.
In contrast to rising rate-hike speculation in the United States, data on Wednesday showing euro zone inflation slowed to a 14-month low in February highlighted that a rate rise from the European Central Bank remains some way off.
That divergence in rate outlooks also weighed on the euro, which hovered at a six-week low at around $1.2173.
The dollar was little changed at 106.69 yen, having slipped from the week’s peak of 107.680 as broader risk aversion favoured its Japanese peer.
Oil fell for a third day yesterday, trading further below $65 a barrel as rising US inventories, record output and a stronger dollar outweighed high Opec compliance with its supply-cutting deal.
Brent crude, the global benchmark, was down 0.98 per cent at $64.10, while US crude was down 0.8 per cent at $61.14.